7 Types of Organizational Structures +Examples, Key Elements

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organizational-structure

Hiring skillful employees is only the first step towards building a high-performing organization. You need to make every team member fit in. You need a clear organizational structure.

Large enterprises require an established, organized structure to coordinate large numbers of employees and avoid chaos. But smaller businesses and startups rarely think of designing an organizational structure in the first place.

This lack of structure leads to miscommunication, work delays, poor process flows, low morale, and other serious consequences that stunt business growth. In contrast, a strong organizational structure helps to coordinate teamwork, reduce conflicts, and boost productivity. 

How do you build one? What’s the right type of structure for your company? Read on to learn more.

What Is Organizational Structure?

Organizational structure is the backbone of all the operating procedures and workflows at any company. It determines the place and the role of each employee in the business, and is key to organizational development.

A clear structure allows every team member to be involved. When employees know what they’re responsible for and who they report to – which isn’t the case in many fast-growing companies – they’re more likely to take ownership of their work. 

To build an org structure, you need to consider your business size, life cycle, goals, and positioning. Apart from considering the current environment your company operates in, you should also think of where you want to see the organization in five years – as its a pillar of organizational health.

Is It Possible to Change an Organization’s Structure?

Of course, organizational design can be reconstructed if needed. The business landscape is constantly evolving, and keeping to a structure that has worked for years might simply become inefficient. 

To adapt to market changes, you might need to resort to organizational transformation which affects not only your strategy but also the structure. Whether you want to build an organizational structure from scratch or want to revisit the existing one, you’ll need to get down to the basics.

Basic Elements of Organizational Structure Design

An organizational structure is based on a range of elements, including:

  • Work specialization
  • Departmentation
  • Chain of command
  • Span of control
  • Centralization/Decentralization
  • Formalization

Work specialization

Work specializations define how responsibilities are split between employees based on the job description. It’s used to split projects into smaller work activities and assign digestible tasks to individual employees. The most common results of improper specialization are low efficiency and burnout.

Documentation

Documentation is an act of grouping specialists on the basis of the job description, skills, location, or other factors that connect them. 

The biggest challenge is choosing the criteria for departmentation. In many cases, it’s no more enough to apply functional departmentation – where employees are grouped based on the tasks they perform. Startups often go for matrix departmentation that involves combining two types of departmentation and takes the best out of both worlds. For instance, functional departmentation can be joined by geographical departmentation to better serve clients in different locations.

Chain of command

Chain of command represents a system for passing instructions and reporting within an organization. Ideally, it distributes the power, supports knowledge sharing, and encourages employee accountability.

Chain-of-Command

The traditional chain of command makes decision-making more complex and does not allow for much flexibility. On the contrary, modern approaches strive to enhance employee autonomy and avoid micromanagement.

Span of control

Span of control regulates the number of direct reporters managed by a single supervisor. It heavily depends on the three aforementioned elements of organizational structure. Furthermore, to identify the right span of control, you need to evaluate your leaders’ capacity, workplace size,  and experience level of employees.

Centralization and decentralization

Centralization and decentralization are the concepts defining how managers, as well as employees, give input on company goals and strategy. While centralization gives leaders the ultimate control over decision-making processes, decentralization allows employees to impact business decisions. We’ll dive into centralized and decentralized organizational structures in the further section.

Formalization

Formalization determines to which extent business processes, policies, and job descriptions are standardized. It may regulate communication between employees and managers, workplace culture, operational procedures, etc.

Centralized vs. Decentralized Organizational Structures

Back to centralization and decentralization. When designing an organizational structure, you’ll need to choose a side. Do you want to implement top-down or bottom-up management?

Centralized organizational structure

As has been said, in a centralized organizational structure, decisions are made by top managers and are distributed down the chain of command. 

For sure, the structure has a range of advantages. It ensures greater control over business processes. But most importantly, it only includes highly experienced professionals that are able to foresee the effect of decisions made in the long run.

centralized-org-structure

The biggest drawback of a centralized organizational structure is the amount of time the decision-making process takes in large companies. Imagine a customer support manager being asked to implement an exclusive package for a high-ticket customer. To get permission, they’d need to run the request up the chain of command and wait for it to be processed by top management. When the request is approved, a high-ticket customer might no longer be there.

Decentralized organizational structure

To avoid this issue, large organizations turn to decentralization. In a decentralized structure, lower-level employees pinpoint issues and make decisions before communicating it to upper management. Greater autonomy not only empowers employees but also eliminates process delays, which are common for centralized systems.

decentralized-org-structure

However, decentralization also brings coordination challenges and higher expenses.

Often, it’s recommended that early-stage startups and small businesses go after a centralized organizational structure. Fast-growing companies and enterprises usually choose a decentralization framework.

7 Types of Organizational Structures

The key purpose of any organizational structure is to make the processes more straightforward. However, there are many ways to achieve that.

Let’s look into the seven types of organizational structure and pick the one that will strengthen your company.

1. Functional structure

A functional structure groups employees into different departments by work specialization. Each department has a designated leader highly experienced in the job functions of each employee supervised by them.

Most often, it implements a top-down (centralized) decision-making process where department managers report to upper management. Ideally, leaders of different teams communicate regularly and coordinate their strategies while lower-level employees have little idea of the processes taking place outside their department.

The main challenge companies with a functional structure face is the lack of coordination between departments. Employees may lose the larger company context when focusing on very specific tasks and failing to interact with members of other departments. 

To create a functional organizational structure that works, you’ll need to train leaders to foster collaboration across departments

2. Divisional structure

A divisional structure organizes employees around a common product or geographical location. Divisional organizations have teams focused on a specific market or product line.

Examples of companies applying a divisional structure are McDonald’s Corporation and Disney. These brands can’t help but split the entire organization by location to be able to adjust their strategies for audiences representing different markets.

These smaller groups are relatively independent and mainly follow a decentralized framework. Still, the leaders of each department are likely to operate under centralized corporate management. It means that company culture is dictated by top management, but operational decisions can be made by each division independently.

Giants such as McDonald’s and Disney also add functional units to their structure for better control.

3. Matrix structure

Within a matrix organizational structure, team members report to several managers at once. Wait, what’s the point?

Having multiple supervisors allows for company-wide interaction and faster project delivery. For instance, when answering to functional managers and project managers, employees have a chance to collect experience outside their team. While functional managers can help to solve job-specific issues, project managers can bring in knowledge or talents from other departments.

matrix-structure-example

If you go after a matrix organizational structure, you’ll need to find a way to avoid authority confusion and prevent conflicts between managers. 

4. Team structure

A team-based organizational structure creates small teams that focus on delivering one product or service. These teams are capable of solving problems and making decisions without bringing in third parties.

team-structure-example

Team members are responsible for managing their workload and have full control over the project. Team-based organizations are distinguished by little formalization and high flexibility. This structure works well for global organizations and manufacturers.

5. Network structure

A network structure goes far beyond your internal company structure. It’s an act of joining the efforts of two or more organizations with the goal of delivering one product or service. Typically, a network organization outsources independent contractors or vendors to complete the work.

network-approach-to-structure

In a network organization, teams are built from full-time employees as well as freelance specialists – this way, in-house workers can spend most of their time focusing on the work they specialize in. Such an approach allows companies to adapt to market changes and obtain the missing skills fast.

Working with individuals that aren’t integrated into your company culture results in lower formalization and higher agility.

6. Hierarchical structure

You must already have an idea of what a hierarchical structure is. It’s the most common organizational structure type that follows a direct chain of command.

A chain of command, in this case, goes from senior management to general employees through a range of executives on the departmental and team level. The highest-level executive has the highest power over the decision-making process.

hierarchical structure chart example

On one hand, this structure enables organizations to streamline business processes, develop clear career paths, and reduce conflicts. A company hierarchy leaves no place for challenging managers’ authority, which can be good in some cases. 

On the other hand, a hierarchical structure slows down decision-making and may hurt employee morale.

7. Flat organization structure

In a flat organizational structure, there are few middle managers between employees and top managers. The structure requires less supervision, increases employee involvement, and boosts trust in the workplace.

flat-organizational-structure-example

Due to its simple nature, a flat organization structure, also called a “flatarchy”, is typically used by small businesses and startups.

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How to Design Your Organization’s Structure

Whatever structure you choose, you’ll need to make an effort to implement it. Here are eight simple steps towards designing an organizational structure from scratch.

1. Create a charter

First of all, you need to prepare documentation.

You need a project charter outlining the purpose of building a clear structure, key stakeholders, and their responsibilities. This is your rough plan for implementing an organizational structure that should give you a direction for your next steps.

When creating a charter, you’ll be able to answer the following questions:

  • Why do we need to design (or re-design) an organizational structure?
  • When do we start?
  • Who are the key stakeholders in this project?
  • What should we do first?
  • Where is the company headed? Will our organizational structure be relevant in a year?

2. Build your strategy

To build a structure from scratch, you’ll need to start by outlining a long-term strategy and mapping out goals. Your future vision of your company determines which type of organizational structure will work best for you.

3. Assess your internal processes & systems

If your business has already been operating for quite some time, take a look at your current strategy and try to highlight the areas of improvement. Do you need to revisit your core ideology and company culture? You can only answer this question by talking to your employees and managers.

When you know where you stand and have a clear vision of what you want to achieve, creating an organizational direction shouldn’t be a problem.

4. Design your structure

A clear understanding of your company’s strategy lets you filter out irrelevant organizational structure types and pick the one that fits with your core values, mission, and goals.

Choose one of the seven organizational structures and use it as a template for designing a custom organizational chart. This chart is also known as an organogram  – it’s a diagram used to visualize the relationships between individuals, teams, and departments within an organization

5. Create a transition plan

Next, it’s time to design an optimal workflow for implementing or switching to a new structure. 

Talk to the stakeholders and decide on the deadlines for establishing a brand new organizational structure. Prepare a list of recommendations for top managers and team leaders that will help to communicate the change to the rest of the organization.

6. Implement your new structure

From there, leaders should create an implementation plan that includes training their teams to adopt new roles and skills, as well as how to follow a new decision-making and reporting framework. Week by week, employees will become accustomed to their new organizational structure and adapt to the change

7. Monitor the impact

The transition process might take months, and it’s very likely that the performance of individual employees or even entire teams will go down at some point. However, you can assess the impact of a new structure in action only after the transition is complete.

With a new organizational structure in place, run the performance review and talk to executives. It’s important that you monitor the contribution of each individual department – chances are the changes don’t work equally well for everyone at the company.

8. Gather feedback & improve

Again, once you implement an organizational structure, it’s never too late to make adjustments. Alongside performance checks, survey your employees to learn how they feel about a new structure. It can be that their input will help you fine-tune the organizational design without extra cost and effort.

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